Corporate law reform: A delicate balance

By Johan Brink, director, Brink Cohen le Roux Inc.

In May 2004, the South African Department of Trade and Industry released a policy paper entitled ‘South African Company Law for the 21st Century – Guidelines for Corporate Law Reform’.

The policy paper sets out the basis for a redraft of the South African Companies Act 1973. The overall aim is to streamline the Companies Act, to bring it into line with 21st century legal thinking and practice, thereby ensuring a regulatory framework that will promote growth, innovation, stability, good governance, confidence and international competitiveness.

Company law has existed in South Africa since 1861 and is still largely based on English law.

Fundamental legal developments have taken place in South Africa since 1973. Apart from the adoption of the new Constitution in 1996, incorporating a Bill of Rights in Chapter 2, worldwide failures of large corporates, the Second King Report on Corporate Governance and the Sarbanes Oxley Act in the US, all contributed to an environment of change.

The policy paper envisaged a draft bill to be submitted to the South African parliament during January 2006 for proclamation during June of this year. Public consultation on the policy document will be allowed, with draft legislation not expected before December 2006 at the earliest.

The policy paper touches on the following issues:

Decriminalisation of the Act
The current Act exposes companies and their boards of directors to possible prosecution for minor technical and administrative offences. These sections are neither enforced nor policed in an effective manner;
Directors’ fiduciary duties
Traditionally, directors must exercise their powers “for the benefit of the company as a whole”. This obliges directors to act in the “long-term interests of shareholders as a whole”. The interests of employees, creditors, suppliers or society at large should be disregarded. The policy paper favours movement away from the traditional shareholder model towards the concept of “enlightened shareholder value” referred to in the UK’s Government White Paper on Modernising Company Law, Command Paper 5553, which was released during August 2004. The model, if adopted, would compel directors to have regard, where appropriate to “ensure productive relationships with a range of interested parties often termed ‘stakeholders’” but with shareholders’ interests nevertheless retaining primacy;
Board structure
The policy paper alludes to two models: either a unitary board or a two-tier board on which employees would be represented. Employee representation at board level in a developing economy poses inherent difficulties relating to confidentiality and the scope of the fiduciary duties attributable to employee directors. Current views favour the Swedish model of a unitary board with stakeholder representation as an option, rather than an obligation;
Single business entity
The policy paper debates the relative merit of separating public and private companies from close corporations and the need for a single business entity. It contemplates mandatory provisions that will apply to all legal entities with optional provisions and default provisions in cases where no provision is made. Failure to distinguish between listed entities and corporations aimed at small to medium-sized enterprises may, however, represent major practical difficulties and hopefully this distinction will be retained;
Capital maintenance
A general prohibition against financial assistance for or in connection with the purchase of or subscription for shares is likely to be relaxed to incorporate the US-styled compliance with solvency and liquidity tests as prerequisites for financial assistance;
Shareholder and investor protection
Four basic rights of shareholders are likely to be protected: a right to capital, a right to income, a right to vote and a right to information;
Mergers and takeovers
The policy paper discusses the relative merit of a separate takeover code, which is currently administered by the South African Securities Regulation Panel (SRP). Practitioners would prefer the scheme of arrangement procedure to be retained in addition to the more cumbersome and time-consuming takeover offers contemplated by the Companies Act;
Insolvency
The current provisions regarding judicial management have fallen in disuse and a more simplified and workable corporate rescue model will be developed;
Practical issues
A new companies and intellectual properties commission is envisaged, which is aimed at streamlining administration and registration procedures.

It is early days for company law reform in South Africa. A draft bill has yet to be produced and is not expected before December 2006. The underlying intention is to simplify the law. The true challenge will, however, come when the Act in its simplified form is put to the test by the courts. Simplicity at the cost of uncertainty is not justifiable and a delicate balance will have to be struck between laudable attempts at simplifying the law and an approach that is aimed at doing so, merely for the sake of simplification.